Home >Markets >Mark To Market >Glenmark’s 12-year wait to unlock value ends with Life Sciences IPO

About 12 years before Glenmark Life Sciences Ltd filed its draft red herring prospectus (DRHP) for an initial public offering (IPO), its wholly-owned entity, Glenmark Generics Ltd, had filed its draft prospectus and had even received approval from the markets regulator. But the IPO was eventually cancelled along with other planned issues as the market conditions were not conducive.

Back then, Glenmark Generics housed Glenmark’s generics and active pharmaceutical ingredients (API) business. This was eventually amalgamated into the parent firm, reversing the decision to hive off the business in fiscal 2008-09. In the same fiscal year, another hive-off was done, but only of the API business into Glenmark Life Sciences (GLS).

In a rare instance of having one’s cake and eating it, too, Glenmark Pharmaceuticals, the parent, will be raising about 450 crore by selling about 5.9% of its shares in the firm, and will also receive another 800 crore from the fundraising by Glenmark Life Sciences, as part of a business transfer arrangement between the parent and the subsidiary firm.

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Satish Kumar/Mint

But while pharma stocks have been in demand post-covid, the valuation at the upper end of the IPO price band, at 720 per share, is modest. This results in an enterprise value to Ebitda valuation of 14.5 times, using FY21 earnings, which is lower than most listed API firms. A mid-June report by Nomura India said firms such as Neuland and Hikal trade at 19 times FY21 Ebitda, and Aarti Drugs and Solara trade at 16 times; Divi’s Labs, a niche firm, has a far higher valuation of 39-40 times.

The relatively modest IPO pricing perhaps increases the possibility of a decent listing pop, which can enhance the value of the 83% stake it will hold in the post-IPO equity base. But the listing gains would have to be very high to influence the parent’s share price.

“We don’t think this (a listing at a valuation of 15 times Ebitda) would necessarily lead to material value unlocking due to holding company discount for API business and increase in cash flow stress in ex-API business. We note that GLS free cash flow is 30-50% of the consolidated free cash flow in FY20-21," said analysts at Nomura India.

While earnings growth has been decent thus far, prospects ahead may be challenging, said the broker. “We don’t expect any material improvement in profitability of the API business, at least in the short run. The company has been able to sustain Ebitda margin at ~30% over the past three years, which is ahead of most peers. Capacity utilization, at 85%, is high, with relatively high asset turn at the moment." Even so, the IPO will help the parent reduce debt from 3,549 crore at the end of FY21, which is a positive.

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